‘Investment grade may push peso to undesirable levels’

Christian B. Bautista
A study projects the peso to increase by 4% to 5% against the US dollar in 2013 on the back of strong capital inflows

ARRESTED APPRECIATION. Authorities may "carry out strong measures" to stall the appreciation of the peso. Photo by AFP

MANILA, Philippines – Foreign capital inflows following the Philippines’ upgrade to investment grade status may elevate the peso to “undesirable levels,” according to a report.

“While the Fitch Ratings upgrade of the Philippines to investment grade rating (BBB-) can give the country a ride toward its targeted economic growth, it may also push the peso to undesirable levels,” said the First Metro Investment Corp. (FMIC) and University of Asia and the Pacific (UA&P) Capital Markets Research Center in its latest Market Call released on Tuesday, April 30.

The report said that the peso is likely to appreciate 4% to 5% against the US dollar in 2013. The peso appreciated by 4.7% in February and 5% in March.

It was the best-performing Southeast Asian currency in 2012. It closed at P41.05 against the greenback on the last trading day of 2012, up 6.53% from its P43.919 opening on the first trading day that year.

According to the BSP’s reference exchange rate bulletin, the peso closed at P41.161 on April 30, 2013.

The Philippines was awarded its first-ever investment grade rating on March 27. Fitch Ratings attributed the upgrade to the country’s robust economy and its improved fiscal management. On the same day, the Philippine Stock Exchange reached a new record high.

‘Serious threat’

In its previous Market Call, the FMIC-UA&P research center said that a strong peso poses a “serious threat” to exports, overseas Filipino worker (OFW) remittances and the business process outsourcing industry (BPO).

If the peso touches the P39-to-the-dollar level, there could be harmful effects, said online stockbroker COL Financial.

“If it beats the 40, and goes to 39 and below. That could be critical, critical in the sense that a lot of businesses that depend on foreign inflows such as BPOs could be affected,” COL Financial President and CEO Conrado Bate said.

“It could be negative if it happens very fast, (like) within the year. If it happens in the next 3 years, it’s fine. It should be gradual). You need people to adjust.”

Bate said things could get worse if the peso appreciates to P38 to the dollar this year. He said a lot of businesses would go under.

Last January, Goldman Sachs ASEAN economist Mark Tan said that the peso might appreciate to P37.50 in 2013 due to the influx of investments in Philippine capital markets.

Stalling the peso’s rise

The FMIC-UA&P report said that the Bangko Sentral ng Pilipinas (BSP) and the Department of Finance (DOF) are “prepared to carry out strong measures” to stall the appreciation of the peso.

“The BSP may tweak reserve requirement and further slash SDA rates (by at least 50bps) to stem the peso appreciation. Given the new rating of the country, the BSP is expected to be more vigilant (with more stringent macro-prudential measures) with respect to the upside risk of asset price bubbles given very low interest rates.”

The BSP has used strategies such as hiking dollar purchases and increasing capital requirements on non-deliverable forwards (NDFs) held by banks to stem the peso’s rise. NDFs are supposedly used by banks to earn from peso speculation. – Rappler.com